Spanish, Portuguese Bonds Drop as Europe's Debt Crisis Deepens - Bloomberg

Spanish and Portuguese government bonds fell as speculation mounted that Europe?s debt crisis will hurt more economies, sapping demand for debt issued by the region?s high-deficit nations.

Spanish 10-year bonds fell for a sixth straight week, the longest run since the period ending June 22, 2007, as officials raced to complete an aid agreement for Ireland in an effort to contain the meltdown of its banks. The Irish yield premium over benchmark German bonds reached a record after Prime Minister Brian Cowen requested an international bailout on Nov. 21.

?The market has lost faith over the likelihood that the Irish problem can be ring fenced,? said Steven Mansell, director of interest-rate strategy at Citigroup Global Markets Ltd. in London. ?It?s a transformation from a market thinking the problem resided in the weaker periphery to a situation where the market is worried about a broader-based contagion.?

Spanish 10-year bond yields were 5.20 percent as of 4:43 p.m. in London yesterday, from 4.74 percent a week earlier. The 4.85 percent security maturing in October 2020 fell 3.51, or 35.10 euros per 1,000-euro ($1,323) face amount, to 97.295. The yield premium over bunds widened to as much as 264 basis points, a euro-era record.

The debt crisis that started a year ago in Greece has deepened since European Union leaders on Oct. 29 agreed to consider German Chancellor Angela Merkel?s demand for a crisis- resolution mechanism that forces bondholders to share the cost of future bailouts. European finance ministers will probably meet on the afternoon of Nov. 28 to complete the terms of a rescue package for Ireland, a European Union official said on condition of anonymity.

Exit Emergency Measures

Adding to the pressure on the euro area?s high-deficit nations is the European Central Bank?s push to scale back liquidity provisions to lenders in the region. Bank council member Erkki Liikanen said in the past week the ECB may reverse its exit from such support measures ?if required.? Policy makers meet next week and economists unanimously estimate they will keep the bank?s main interest rate unchanged at 1 percent.

Irish 10-year bonds slid, with the yield advancing 99 basis points to 9.34 percent. The yield premium over bunds reached a euro-era record 656 basis points. Portugal?s 10-year yield rose to 7.14 percent from 6.96 percent. The German bund yield rose three basis point on the week to 2.73 percent.

Portuguese government bonds lost 5.5 percent this month, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. They have fallen 10 percent so far this year.

Irish bonds dropped 10 percent in the month to date and 16 percent since Dec. 31, 2009. German bunds handed investors a 0.9 percent loss in November, paring the advance for the year to 7.1 percent.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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